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Twitter Plunges Despite Strong Earnings

Twitter stock performed its own high dive on Friday, following Facebook earlier this week, by falling 20% despite a second quarter result that was mostly better than expected. Revenue and Twitter’s primary profitability metric—a version of earnings excluding various charges—were both up more than Wall Street anticipated. Monthly active users declined slightly from the first quarter, although that appeared to be partly Twitter’s own doing—the company said it was emphasizing the “health” of the platform.

Given the growth of Twitter’s advertising business, Wall Street’s negative reaction might seem to be overdone. But Twitter stock had rallied in recent months for no good reason. Stocks, including those in the tech sector, have long ago ceased to trade on fundamentals and are more driven by momentum factors—what’s going up will keep going up, and vice versa. In that environment, an overreaction on the downside has to be expected. And despite the sell-off, Twitter stock still doesn’t look cheap, trading at around 10 times revenue. 

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